Debt sustainability and the effectiveness of fiscal policy tools - The case of the Maldives

This study examines the effects of fiscal policy tools—spending cuts versus tax hikes—on debt sustainability and economic growth in the Maldives. Using a structural vector autoregressive model, we assess short- and long-term impacts on debt. Results indicate that tax revenue management effectively reduces debt, while government spending cuts contribute similarly in the short term and significantly more in the long term. Economic growth, conversely, stabilizes debt in the short term but fuels it over time. Our findings highlight the importance of policy composition in managing debt sustainably, emphasizing the effectiveness of tax revenue over expenditure adjustments for long-term stability.